NHTSA’s Request for a Jeep Recall and its Potential Effects

Fiat-Chrysler CEO Sergio Marchionne has done much to turn around the fortunes of Chrysler Group LLC, from implementing a renewed focus on product quality to realizing the company’s newfound sales success. With Fiat S.p.A. facing financial difficulties stemming from the continued economic downturn in Europe, Chrysler has taken a key role as the breadwinner for the organization, leading to conjecture that Fiat will look to acquire the remaining percentage of the U.S. company that it does not own. If Chrysler is fully-absorbed, the unified entity would then be able to thoroughly optimize operations and further strengthen its brands ahead of issuing a potential IPO. Unfortunately for the automaker though, new implications of major quality issues have diverted attention from those initiatives, as it appears the latest challenge has come in the form of controversy related to a potential recall.

Chrysler made waves recently due to its defiance of the National Highway Traffic Safety Administration’s (NHTSA) request for the carmaker to issue a recall of 2.7 million Jeep vehicles. According to a study conducted by NHTSA, 1993-2004 Grand Cherokee and 2002-2007 Liberty models pose a risk of fire resulting from fuel tanks being mounted behind the rear axle. As these vehicles are relatively older models, it is less common for them exhibit significant used price volatility, and NADA has seen no discernible change in used prices to-date. Thus, predictably, data shows that price movement for the two models continues to track closely with with the movement of their respective segments.

While the Jeep vehicles in question may not experience much price degradation due to their advanced ages, it remains to be seen how such a negative spotlight on a perceived lack of concern over driver safety will affect Chrysler Group LLC’s overall reputation. History points to 1978, when a recall of 1.5 million Ford Pinto and Mercury Bobcat models occurred after rear crashes led to the deaths of 27 people, as well as injuring two dozen more. The revelations left Ford Motor Co. with a public relations nightmare in the court of public opinion and for years the company faced an uphill climb to rebuild its image. Compared to the Jeep issue, however, the Ford ordeal does not compare in terms of scope as the 1993-2004 Grand Cherokee and 2002-2007 Liberty vehicles have been involved in a total of 51 deaths and 37 fires as a result of rear-impact crashes. Although news of the Chrysler debate has persisted, it remains to be seen if media coverage will reach such heights that public backlash develops and exacerbates the problem for the domestic automaker.

Back on June 3rd, NHTSA made its recall request to Chrysler Group LLC, however, the following day, the automaker rejected the request, prompting the government agency to give the organization until June 18th to provide a formal response, including details as to why it would not comply. After initial speculation that the carmaker would formally reject a recall, on June 18th, Chrysler announced that it had negotiated an agreement with NHTSA, but as part of the agreement would not admit that any vehicle defects exist. As opposed to issuing a recall, which acknowledges a safety flaw, the automaker will instead conduct a voluntary campaign, which will consist of a visual inspection and, if needed, modification of the vehicle’s rear structure. Also, the inspections will only cover 1.56 million Jeeps as, according to the company, any vehicle with a factory-installed or Mopar aftermarket hitch assembly will not need to be modified.

Although NHTSA commended Chrysler for working to achieve a resolution and protect Jeep drivers, the investigation is ongoing as the government agency plans to continue monitoring the situation. Clarence Ditlow, executive director of the advocacy group, Center for Auto Safety, has been calling for the automaker to issue a recall since 2010 and propositioned NHTSA to do crash tests of the potentially remedied vehicles to assess whether or not the proposed fix effectively meets federal safety standards. If they fail the tests, he believes the development of a more effective modification should be required of Chrysler by NHTSA.

Looking back at Toyota’s unintended acceleration controversy that began to unfold in late 2009, multiple recalls of millions of vehicles built by Toyota Motor Corporation left the Japanese automaker with a serious matter on its hands and many questions to answer. Litigation ensued and accusations of negligence committed by the company had taken a toll on its stellar reputation for product quality and safety. After a ten-month study conducted by NHTSA and NASA to investigate the root causes of the Toyota malfunctions, on February 8, 2011, the government announced that no faults existed in the electronics of the cars that could cause unintended acceleration. Despite conclusive evidence showing the issues were mechanical and, in most cases, due to driver error and/or pedal misapplication, months of negative publicity and extensive media coverage left Toyota with a sullied reputation, which clearly negatively affected used vehicle prices. As can be seen in the chart below, for example, the Toyota Camry enjoyed a significant premium in its used price versus the segment average before the recalls occurred, yet has since struggled to regain its previous level of success prior to the investigation. It is important to note that this response was not isolated to the Camry, and that similar trends occurred on other Toyota models.

Chrysler Group LLC has taken many positive strides over the past few years, but only time will tell whether or not the company’s Jeep recall will merely be a bump in a road or something much worse. Toyota’s case proved that even an automaker with a gleaming reputation for safety and quality can have a difficult time defending its image once the spotlight gets hot enough. The Japanese automaker was by and large exonerated of charges related to allegedly producing electronically defective vehicles yet was not exempt from bearing the substantial costs that resulted from the unintended acceleration controversy. Thus, many questions remain over Chrysler’s handling of the Jeep recall request even though the affected Grand Cherokee and Liberty models have not experienced greater than normal price degradation. While the situation began as a recall request of two old Jeep models by NHTSA, it has now evolved into a matter of Chrysler fighting the notion that the carmaker’s resistance to the recall is evidence of its lack of concern over driver safety and product quality. Going forward, the company’s greatest challenge may be preventing the negative perception of its older vehicles from spreading to its current and future models, which would prove far more costly to Chrysler Group LLC’s recovery.